Tag: disruptive innovation

There are few examples of disruptive innovation as clear as what happened to Research in Motion/Blackberry, the former giant when it came to smart mobile devices for businesspeople (and a device which was previously super-important to me). Despite a seemingly unassailable market position and huge profits, they were caught off-guard by the more software-and-consumer centric smartphone wave that followed, the result being an astonishing 94% loss in company value in 5 years (HT: Quartz):

A colleague of mine shared an interesting article by Sarah Lacy from tech site Pando Daily about the power of technology building the next set of “digital skyscrapers” – Lacy’s term for enduring, 100-year brands in/made possible by technology. On the one hand, I wholeheartedly agree with one of the big takeaways Lacy wants the reader to walk away with: that more entrepreneurs need to strive to make a big impact on the world and not settle for quick-and-easy payouts. That is, after all, why venture capitalists exist: to fund transformative ideas.

But, the premise of the article that I fundamentally disagreed with – and in fact, the very reason I’m interested in technology is that the ability to make transformative ideas means that I don’t think its possible to make “100-year digital skyscrapers”.

In fact, I genuinely hope its not possible. Frankly, if I felt it were, I wouldn’t be in technology, and certainly not in venture capital. To me, technology is exciting and disruptive because you can’t create long-standing skyscrapers. Sure, IBM and Intel have been around a while — but what they as companies do, what their brands mean, and their relative positions in the industry have radically changed. I just don’t believe the products we will care about or the companies we think are shaping the future ten years from now will be the same as the ones we are talking about today, nor were they the ones we talked about ten years ago, and they won’t be the same as the ones we talk about twenty years from now. I’ve done the 10 year comparison before to illustrate the rapid pace of Moore’s Law, but just to be illustrative again: remember, 10 years ago:

the iPhone (and Android) did not exist

Facebook did not exist (Zuckerberg had just started at Harvard)

Amazon had yet to make a single cent of profit

Intel thought Itanium was its future (something its basically given up on now)

Yahoo had just launched a dialup internet service (seriously)

The Human Genome Project had yet to be completed

Illumina (posterchild for next-generation DNA sequencing today) had just launched its first system product

And, you know what, I bet 10 years from now, I’ll be able to make a similar list. Technology is a brutal industry and it succeeds by continuously making itself obsolete. It’s why its exciting, and it’s why I don’t think and, in fact, I hope that no long-lasting digital skyscrapers emerge.

Last week, I attended a MIT/Stanford VLAB event on 3D printing technologies. While I had previously been aware of 3D printing (which works basically the way it sounds) as a way of helping companies and startups do quick prototypes or letting geeks of the “maker” persuasion make random knickknacks, it was at the event that I started to recognize the technology’s disruptive potential in manufacturing. While the conference itself was actually more about personal use for 3D printing, when I thought about the applications in the industrial/business world, it was literally like seeing the first part/introduction of a new chapter or case study from Clayton Christensen, author of The Innovator’s Dilemma (and inspiration for one of the more popular blog posts here :-)) play out right in front of me:

Like many other disruptive innovations when they began, 3D printing today is unable to servethe broader manufacturing “market”. Generally speaking, the time needed per unit output, the poor “print resolution”, the upfront capital costs, and some of the limitations in terms of materials are among the reasons that the technology as it stands today is uncompetitive with traditional mass manufacturing.

Even if 3D printing were competitive today, there are big internal and external stumbling blocks which would probably make it very difficult for existing large companies to embrace it. Today’s heavyweight manufacturers are organized and incentivized internally along the lines of traditional assembly line manufacturing. They also lack the partners, channels, and supply chain relationships (among others) externally that they would need to succeed.

While 3D printing today is very disadvantaged relative to traditional manufacturing technologies (most notably in speed and upfront cost), it is extremely good at certain things which make it a phenomenal technology for certain use cases:

Rapid design to production: Unlike traditional manufacturing techniques which take significant initial tooling and setup, once you have a 3D printer and an idea, all you need to do is print the darn thing! At the conference, one of the panelists gave a great example: a designer bought an Apple iPad on a Friday, decided he wanted to make his own iPad case, and despite not getting any help from Apple or prior knowledge of the specs, was able by Monday to be producing and selling the case he had designed that weekend. Idea to production in three days. Is it any wonder that so many of the new hardware startups are using 3D printing to do quick prototyping?

Short runs/lots of customization: Chances are most of the things you use in your life are not one of a kind (i.e. pencils, clothes, utensils, dishware, furniture, cars, etc). The reason for this is that mass production make it extremely cheap to produce many copies of the same thing. The flip side of this is that short production runs (where you’re not producing thousands or millions of the same thing) and production where each item has a fair amount of customization or uniqueness is really expensive. With 3D printing, however, because each item being produced is produced in the same way (by the printer), you can produce one item at close to the same per unit price as producing a million – this makes 3D printing a very interesting technology for markets where customization & short runs are extremely valuable.

Shapes/structures that injection molding and machining find difficult: There are many shapes where traditional machining (taking a big block of material and whittling it down to the desired shape) and injection molding (building a mold and then filling it with molten material to get the desired shape) are not ideal: things like producing precision products that go into airplanes and racecars or printing the scaffolds with which bioengineers hope to build artificial organs are uniquely addressable by 3D printing technologies.

Low labor: The printer takes care of all of it – thus letting companies cut costs in manufacturing and/or refocus their people to steps in the process which do require direct human intervention.

And, of course, with the new markets which are opening up for 3D printing, its certainly helpful that the size, cost, and performance of 3D printers has improved dramatically and is continuing to improve – to the point where the panelists were very serious when they articulated a vision of the future where 3D printers could be as widespread as typical inkjet/laser printers!

Ok, so why do we care? While its difficult to predict precisely what this technology could bring (it is disruptive after all!), I think there are a few tantalizing possibilities of how the manufacturing game might change to consider:

The ability to do rapid design to productionmeans you could do“fast fashion” for everything – in the same way that companies like Zara can produce thousands of different products in a season (and quickly change them to meet new trends/styles), broader adoption of 3D printing could lead to the rise of new companies where design/operational flexibility and speed are king, as the companies best able to fit their products to the flavor-of-the-month gain more traction.

The ability to do customization means you can manufacture custom parts/products cost-effectivelyand without holding as much inventory; production only needs to begin after an order is on hand (no reason to hold extra “copies” of something that may go out of fashion/go bad in storage when you can print stuff on the fly) and the lack of retooling means companies can be a lot more flexible in terms of using customization to get more customers.

I’m not sure how all the second/third-order effects play out, but this could also put a damper on outsourced manufacturing to countries like China/India – who cares about cheaper manufacturing labor overseas when 3D printing makes it possible to manufacture locally without much labor and avoid import duties, shipping delays, and the need to hold on to parts/inventory?

I think there’s a ton of potential for the technology itself and its applications, and the possible consequences for how manufacturing will evolve are staggering. Yes, we are probably a long way off from seeing this, but I think we are on the verge of seeing a disruptive innovation take place, and if you’re anything like me, you’re excited to see it play out.

Take ARM, the upstart British chip company which licenses the chip technology which powers virtually all mobile phones today. Although they’ve traditionally been relegated to “dumb” chips because of their low cost and low power consumption, they’ve been riding a wave of disruptive innovation to move beyond just low cost “dumb” featurephones into more expensive smartphones and, potentially, into new low-power/always-connected netbooks.

More interestingly, though, is the recent revelation that ARM chips have been used in more than just low-power consumer-oriented devices, but also in production grade servers which can power websites, something which has traditionally been in the domain of more expensive chips by companies like AMD, Intel, and IBM.

A cab driver the other day went off on me with a rant about how new smartphone users were all smug, arrogant gadget snobs for using phones that did more than just make phone calls. “Why you gotta need more than just the phone?”, he asked.

While he was probably right on the money with the “smug”, “arrogant”, and “snob” part of the description of smartphone users (at least it accurately describes yours truly), I do think he’s ignoring a lot of the important changes which the smartphone revolution has made in the technology industry and, consequently, why so many of the industry’s venture capitalists and technology companies are investing so heavily in this direction. This post will be the first of two posts looking at what I think are the four big impacts of smartphones like the Blackberry and the iPhone on the broader technology landscape:

It’s the software, stupid

Look ma, no <insert other device here>

Putting the carriers in their place

Contextuality

I. It’s the software, stupid!

You can find possibly the greatest impact of the smartphone revolution in the very definition of smartphone: phones which can run rich operating systems and actual applications. As my belligerent cab-driver pointed out, the cellular phone revolution was originally about being able to talk to other people on the go. People bought phones based on network coverage, call quality, the weight of a phone, and other concerns primarily motivated by call usability.

Smartphones, however, change that. Instead of just making phone calls, they also do plenty of other things. While a lot of consumers focus their attention on how their phones now have touchscreens, built-in cameras, GPS, and motion-sensors, the magic change that I see is the ability to actually run programs.

Why do I say this software thing more significant than the other features which have made their ways on to the phone? There are a number of reasons for this, but the big idea is that the ability to run software makes smartphones look like mobile computers. We have seen this pan out in a number of ways:

The potential uses for a mobile phone have exploded overnight. Whereas previously, they were pretty much limited to making phone calls, sending text messages/emails, playing music, and taking pictures, now they can be used to do things like play games, look up information, and even be used by doctors to help treat and diagnose patients. In the same way that a computer’s usefulness extends beyond what a manufacturer like Dell or HP or Apple have built into the hardware because of software, software opens up new possibilities for mobile phones in ways which we are only beginning to see.

Phones can now be “updated”. Before, phones were simply replaced when they became outdated. Now, some users expect that a phone that they buy will be maintained even after new models are released. Case in point: Users threw a fit when Samsung decided not to allow users to update their Samsung Galaxy’s operating system to a new version of the Android operating system. Can you imagine 10 years ago users getting up in arms if Samsung didn’t ship a new 2 MP mini-camera to anyone who owned an earlier version of the phone which only had a 1 MP camera?

An entire new software industry has emerged with its own standards and idiosyncrasies. About four decades ago, the rise of the computer created a brand new industry almost out of thin air. After all, think of all the wealth and enabled productivity that companies like Oracle, Microsoft, and Adobe have created over the past thirty years. There are early signs that a similar revolution is happening because of the rise of the smartphone. Entire fortunes have been created “out of thin air” as enterprising individuals and companies move to capture the potential software profits from creating software for the legions of iPhones and Android phones out there. What remains to be seen is whether or not the mobile software industry will end up looking more like the PC software industry, or whether or not the new operating systems and screen sizes and technologies will create something that looks more like a distant cousin of the first software revolution.

II. Look ma, no <insert other device here>

One of the most amazing consequences of Moore’s Law is that devices can quickly take on a heckuva lot more functionality then they used to. The smartphone is a perfect example of this Swiss-army knife mentality. The typical high-end smartphone today can:

take pictures

use GPS

play movies

play songs

read articles/books

find what direction its being pointed in

sense motion

record sounds

run software

… not to mention receive and make phone calls and texts like a phone.

But, unlike cameras, GPS devices, portable media players, eReaders, compasses, Wii-motes, tape recorders, and computers, the phone is something you are likely to keep with you all day long. And, if you have a smartphone which can double as a camera, GPS, portable media player, eReaders, compass, Wii-mote, tape recorder, and computer all at once – tell me why you’re going to hold on to those other devices?

That is, of course, a dramatic oversimplification. After all, I have yet to see a phone which can match a dedicated camera’s image quality or a computer’s speed, screen size, and range of software, so there are definitely reasons you’d pick one of these devices over a smartphone. The point, however, isn’t that smartphones will make these other devices irrelevant, it is that they will disrupt these markets in exactly the way that Clayton Christensen described in his book The Innovator’s Dilemma, making business a whole lot harder for companies who are heavily invested in these other device categories. And make no mistake: we’re already seeing this happen as GPS companies are seeing lower prices and demand as smartphones take on more and more sophisticated functionality (heck, GPS makers like Garmin are even trying to get into the mobile phone business!). I wouldn’t be surprised if we soon see similar declines in the market growth rates and profitability for all sorts of other devices.

The book tries to answer a very interesting question: why do otherwise successful companies sometimes fail to keep up on innovation? Christensen’s answer is counter-intuitive but deep: the very factors that make a company successful, like listening to customer needs, make it difficult for successful companies to adopt disruptive innovations which create new markets and new capabilities.

This sounds completely irrational, and I was skeptical when I first heard it, but Christensen makes a very compelling case for it. He begins the book by considering the hard disk drive (HDD) industry. The reason for this is, as Christensen puts it (and this is merely page one of chapter one!):

“Those who study genetics avoid studying humans, because new generations come along only every thirty years or so, and so it takes a long time to understand the cause and effect of any changes. Instead, they study fruit flies, because fruit flies are conceived, born, mature, and die all within a single day. If you want to understand why something happens in business, study the disk drive industry. Those companies are the closest things to fruit flies that the business world will ever see.”

From that oddly compelling start, Christensen applies multiple techniques to establish the grounds for his theory. He begins by admitting that his initial hypothesis for why some HDD companies successfully innovated had nothing to do with his current explanation and was something he called “the technology mudslide”: that because technology is constantly evolving and shifting (like a mudslide), companies which could not keep moving to stay afloat (i.e. by innovating) would slip and fall.

But, when he investigated the different types of technological innovations which hit the HDD industry, he found that the large companies were actually constantly innovating, developing new techniques and technologies to improve their products. Contrary to the opinion of many in the startup community, big companies did not lack innovative agility – in fact, they were the leaders in developing and acquiring the successful technologies which allowed them to make better and better products.
But, every now and then, when the basis of competition changed, like the shift to a smaller hard disk size to accommodate a new product category like minicomputers versus mainframes or laptops versus desktops, the big companies faltered.

From that profound yet seemingly innocuous observation grew a series of studies across a number of industries (the book covers industries ranging from hardcore technology like hard disk drives and computers to industries that you normally wouldn’t associate with rapid technological innovation like mechanical excavators, off-road motorbikes, and even discount retailing) which helped Christensen come to a basic logical story involving six distinct steps:

Three things dictate a company’s strategy: resources, processes, and values. Any strategy that a company wishes to embark on will fail if the company doesn’t have the necessary resources (e.g. factories, talent, etc.), processes (e.g. organizational structure, manufacturing process, etc.), and values (e.g. how a company decides between different choices). It doesn’t matter if you have two of the three.

Large, successful companies value listening to their customers. Successful companies became successful because they were able to create and market products that customers were willing to pay for. Companies that didn’t do this wouldn’t survive, and resources and processes which didn’t “get with the program” were either downsized or re-oriented.

Successful companies help create ecosystems which are responsive to customer needs. Successful companies need to have ways of supporting their customers. This means they need to have or build channels (e.g. through a store, or online), services (e.g. repair, installation), standards (e.g. how products are qualified and work with one another), and partners (e.g. suppliers, ecosystem partners) which are all dedicated towards the same goal. If this weren’t true, the companies would all either fail or be replaced by companies which could “get with the program.”

Large, successful companies value big opportunities. If you’re a $10 million company, you only need to generate an extra $1 million in sales to grow 10%. If you’re a $10 billion company, you need to find an extra $1 billion in sales to grow an equivalent amount. Is it any wonder, then, that large companies will look to large opportunities? After all, if companies started throwing significant resources or management effort on small opportunities, the company would quickly be passed up by its competitors.

Successful companies don’t have the values or processes to push innovations aimed at unproven markets, which serve new customers and needs. Because successful companies value big opportunities which meet the needs of their customers and are embedded in ecosystems which help them do that, they will mobilize their resources and processes in the best way possible to fulfill and market those needs. And, in fact, that is what Christensen saw – in almost every market he studied, when the customers of successful companies needed a new feature or level of quality, successful companies were almost always successful at either leading or acquiring the innovation necessary to do that. But, when it came to experimental products offering slimmer profit margins and targeting new customers with new needs and new ecosystems in unproven markets, successful companies often failed, even if management made those new markets a priority, because those companies lacked the values and/or processes needed. After all, if you were working in IBM’s Mainframe division, why would you chase the lower-performance, lower-profit minicomputer industry and its unfamiliar set of customers and needs and distribution channels?

Disruptive innovations tend to start as inferior products, but, over time improve and eventually displace older technologies. Using the previous example, while IBM’s mainframe division found it undesirable to enter the minicomputer market, the minicomputer players were very eager to “go North” and capture the higher performance and profitability that the mainframe players enjoyed. The result? Because of the values of the mainframe players as compared with the values of the minicomputer players, minicomputer companies focused on improving their technology to both service their customer’s needs and capture the mainframe business, resulting in one disruptive innovation replacing an older one.

The most interesting thing that Christensen pointed out was that, in many cases, established companies actually beat new players to a disruptive innovation (as happened several times in the HDD and mechanical excavator industries)! But, because these companies lacked the necessary values, processes, and ecosystem, they were unable to successfully market them. Their success actually doomed them to failure!

But Christensen doesn’t stop with this multi-faceted and thorough look at why successful companies fail at disruptive innovation. He spends a sizable portion of the book explaining how companies can fight the “trappings” of success (i.e. by creating semi-independent organizations that can chase new markets and be excited about smaller opportunities), and even closes the book with an interesting “ahead-of-his-time” look (remember, this book was written over a decade ago!) at how to bring about electric cars.

I highly recommend this book to anyone interested in the technology industry or even, more broadly speaking, on understanding how to think about corporate strategy. While most business books on this subject use high-flying generalizations and poorly evaluated case studies, Christensen approaches each problem with a level of rigor and thoroughness that you rarely see in corporate boardrooms. His structured approach to explaining how disruptive innovations work, who tends to succeed at them, why, and how to conquer/adapt to them makes for a fascinating read, and, in my humble opinion, is a great example of how corporate strategy should be done – by combining well-researched data and structured thinking. To top it all, I can think of no higher praise than to say that this book, despite being written over a decade ago, has many parallels to strategic issues that companies face today (i.e. what will determine if cloud computing on netbooks can replace the traditional PC model? Will cleantech successfully replace coal and oil?), and has a number of deep insights into how venture capital firms and startups can succeed, as well as some insights into how to create organizations which can be innovative on more than just one level.